Overheads Copy Signed

8/13/2019 Overheads Copy Signed

1/28

Dr. Parminder Bajaj

Dr. Parminder Bajaj


2/28

All indirect costs are known as overheads.Overheads can be classified in following ways:

According to nature:

Indirect material Indirect labour

Indirect expenses

According to normality Normal overheads

Abnormal overheads

Dr. Parminder Bajaj


3/28

According to controllability Controllable overheads

Uncontrollable overheads

According to variability Fixed overheads

Variable overheads Semi-variable overheads

According to functionFactory overheads

Administrative overheads

Selling and distribution overheads

Dr. Parminder Bajaj


4/28

Provision of obsolescence:1) If provision for obsolescence is created

because actual life is less than estimatedlife, it is like additional depreciation and ischarged to factory overheads.

2) If provision for obsolescence is only forprecautionary measure, it is simply an

appropriation of profits. Hence excludedfrom cost accounts

Dr. Parminder Bajaj


5/28

Cost of defective workCost of normal defective work is treated as works

overhead whereas abnormal defective work istransferred to costing profit and loss account.

Idle capacityIdle capacity is that part of capacity which is not

actually utilized.Treatment

1) When idle time is due to normal andunavoidable reasons, it is included in the worksoverhead

2) When idle time is due to abnormal reasons liketrade depression, it is charged to costing profit

and loss account3) When idle time is avoidable, it is charged tocosting profit and loss account

Dr. Parminder Bajaj


6/28

Interest on capital Argument for inclusion-:1) Interest is a reward for capital like wages are

reward for labour. Therefore it should be included

2) The comparison of operations, processes etc.without consideration of interest give misleadingresults. Stock held for maturing like timber,Whisky and beer cost more on account of rent andinterest

Argument against inclusion-:1) Payment of interest is a matter of internal finance

and is no way connected to cost of manufacturing.2) Determination of fair rate of interest is a problem3) It is very difficult to determine the exact capital on

which interest is to be calculated4) If interest is allowed on capital which is not

borrowed, it will unnecessarily inflate the cost ofproduction

Dr. Parminder Bajaj


7/28

Expenses on erection of machinery - debited toprofit and loss account

Experimental expenses charged to factoryoverheads

Royaltiesif it is paid on output then it is treatedas direct expense, if it is pain on unit sold it istreated as indirect expense

Development cost development cost is puttingthe results of research on practical basis . It maybe charged to specific product . In case if it isheavy it may be charged as deferred expenditure.

Leave travel assistanceleave travel assistanceprovided to production labour is direct cost. AndLTC provided to others may be treated as factory,office or selling as the case may be

Dr. Parminder Bajaj


8/28

Research costa) basic research relates to knowledge of technicalknow how. Therefore charged to production

processb) Applied research relates to improvement in

product or production techniques. Thereforecharged as deferred expenditure

Fringe benefits- in case if these are substantial itmay be charged as direct cost otherwise as a partof overhead

Tool cost large tools are capitalized while smalltools may be treated as overheads

Data processing cost This cost should beapportioned to the deptt. using the services ofthis department on the basis of computer hours,No. of reports processes, no. of cards punched

Dr. Parminder Bajaj


9/28

Market research it involves systematic study ofmarket conditions. Therefore it is a sellingexpense. In case if the research is for particularproduct it should be charged to that product. If itis significant it should be charged as deferredexpenditure.

Discounts- trade discount is deducted frompurchases, while cash discount is purely afinancial matter therefore it should not be

included in cost accounts Donations it is not included in cost accounts After sale service included in selling overhead

Dr. Parminder Bajaj


10/28Dr. Parminder Bajaj


11/28

Allocationallocation is the process of charging fullamount of overhead cost to a particular cost centre

Apportionment it is the process of splitting ofoverhead cost and charging it to a cost centre onsome equitable basis.

Absorption the term absorption refers to charging ofoverhead of overhead to different cost unit in such away that each cost unit bears an appropriate portionof its share of overhead. This is done by means ofoverhead rate. For eg. Overhead of a dep't are10,000, the total wages of different jobs completed

in the dep't are 40,000and the overhead are to becharged as percentage of direct wages , the overheadrate will be 25% of direct wages

Dr. Parminder Bajaj


12/28

Overhead Basis of apportionmentFactory rent Floor area occupied

Depreciation Capital value of asset

Heating and lightening No. of light points

Insurance Capital value of assetElectric power Kwh

Supervision No. of employees

Stores overhead Direct material

Material handling charges Weight of material

Dr. Parminder Bajaj


13/28

ervice dept overhead ApportionmentMaintenance dept Actual service utilized or working

hours

Payroll or time keeping dept Direct labour hours

Personnel dept No. of employees

Store keeping dept no. of requisitions

Purchase dept No. of purchase order

Welfare dept No, of employees

Internal transport service Weight or value of material

Dr. Parminder Bajaj


14/28

Q 1Following have been extracted from a manufacturing concernfor month of dec.

Indirect material : Production deptt x 950

Production deptt y 1200Production deptt z 200

Maintenance deptt P 1500

Stores deptt Q 400

Indirect wages :Production deptt x 900

Production deptt y 1100Production deptt z 300Maintenance deptt P 1000

Stores deptt Q 650

Power and light 6000

Rent and rates 2800

Insurance on asset 1000Meal charges 3000

Depreciation @6% on assets

contd

Dr. Parminder Bajaj

C td


15/28

Contd.

Prepare overhead distribution summary from above information

Dr. Parminder Bajaj

particulars production dept ervice deptx y z P Q

Area 4000 4000 3000 2000 1000

Capital value ofasset

1,00,000 1,20,000 80,000 60,000 40,000

No. of employees 90 120 30 40 20

Kwh 4000 4400 1600 1500 500

Direct labourhours

3600 3200 2200

No, of materialrequisition

900 600 500


16/28

Q 2 The following data is obtained from the books of ABC co. for halfyear ending 30thsept,05. Calculate the departmental overhead ratefor each of production deptt. assuming that overheads are recoveredas percentage of direct wages.

contd

Dr. Parminder Bajaj

particulars production dept ervice deptA B C D E

Direct wages 2000 3000 4000 1000 2000

Direct material 1000 2000 2000 1500 1500

Staff No.s 100 150 150 50 50

Electricity Kwh 4000 3000 2000 1000 1000

Light point No.s 10 16 4 6 4

Asset value 60,000 40,000 30,000 10,000 10,000

Area occupied sq.yd 150 250 50 50 50


17/28


18/28

The entire amount of a servicing department is tobe distributed to only the producingdepartments. Services provided by someservicing departments are used partly by other

servicing department. That is, many servicedepartment serve each other. This is known asinterdepartmental service. There are threemethods available for interdepartmental service.

1) Simultaneous equation method2) Repeated distribution method

3) Trial and error method

Dr. Parminder Bajaj


19/28

Q 3 The following data find out the production hour rate

Expenses of service deptt are apportioned as under:

A B C D ED 30% 40% 20% -- 10%

E 10% 20% 50% 20% ---

Dr. Parminder Bajaj

particulars production dept ervice deptA B C D E

Rent 200 400 150 150 100Electricity 50 80 30 20 20

Fire insurance 80 160 60 60 40

Plant depreciation 1000 1500 1000 300 200

Transport 50 50 50 100 150Estimated workinghours

1000 2500 1800


20/28

Q 3The New Enterprise Ltd. has productionDepts. A, B and C and two service departmentD and E. the following figures are extracted

from the records of the company:

Rent and rates 5,000General Lighting 600

Indirect wages 1,500Power 1,500Depreciation of machinery 10,000Sundries 10,000

The following further details are available:

Dr. Parminder Bajaj


21/28

Dr. Parminder Bajaj


22/28

Percentage method

Hourly rate methodPercentage method1) Direct material cost methodFactory overhead rate = Amount of factory overhead x100

cost of direct material used

2) Direct labour cost methodFactory overhead rate = Amount of factory overhead x100

cost of direct labour

3) Prime cost methodFactory overhead rate = Amount of factory overhead x100prime cost

Dr. Parminder Bajaj


23/28

Hourly rate method1) Machine hour rate methodFactory overhead rate = Amount of factory overhead

machine hours

2) Labour hour rate methodFactory overhead rate = Amount of factory overhead

direct labour hours

3) Dual hour rate method

Where in a shop both manual labour play an equally importantrole

Dr. Parminder Bajaj


24/28

Expenses BasisStanding charges1. Rent and rates Floor area occupied by each

machine

2. Heating and lightening No of light points

3. Supervision Time devoted to each machine

4. Lubricating oil & consumablestores

Capital value or machine hours

5. Insurance Capital value

Machine or running expenses1. Depreciation Machine hours or capital value

2. Power KWH

3. Repairs Machine hours

Dr. Parminder Bajaj


25/28

Q- A manufacturing company uses two identical large and four identical

small machine. Each large machine occupies one quarter of the workshopand fully employed three workers. Each small machine occupies half thespace of a large machine and fully employed two workers

Each of the six machine is estimated to work 1440 hours per year, while the

effective working life is taken as 12,000 working hours for each largemachine and 9000 working hours for each small machine. Large machinecost 20,000 each and small machine 4000 each. Scrap values are 4000and 100 respectively.

Repairs, maintenance and oil are estimated to cost for each large machine4000 and each small machine 1200 during its effective working life.

Power consumption cost 5 P. per unit, and amounts for large machine 20units per hour, and for small machine 2 units per hour.

The manager is paid 4800 a year, and the workshop supervision occupieshalf his time which is divided equally among the six machine. Details ofother expenses are :-

Rent and rates of the workshop : 6400 year

Lightening ( to be apportioned in the ratio of workers employed ) 1820 ayear

Taking the period of three months as basis, calculate the machine hour ratefor a large and a small machine respectively.

Dr. Parminder Bajaj


26/28

Actual overhead rateThe rate is calculated by dividing the total overheads to

be absorbed by actual quantity or value of basisselected. The rate can only be calculated after theoverheads have actually been incurred

Actual overhead rate =Actual overhead expenditure during a month x100

actual base for month Predetermined overhead rateThe rate is determined in advance of incurrence of

overhead rate

Predetermined overhead rate =Budgeted overhead expenditure during a month x100

Budgeted base for month

Dr. Parminder Bajaj


27/28

Where the overheads are charged to differentcost unit on the basis of predeterminedoverhead rate , at the end of the accountingperiod the total overhead charged will be

roughly equal to actual overhead incurredduring that period. In case if the overheadrecovered from production is more thanactual overhead it is said to be overabsorption of overheadin reverse case it istermed as under absorption of overhead

Dr. Parminder Bajaj


28/28

Carrying over of overheads- the amount ofunder or over absorption of overhead may becarried over to the next period

Use of supplementary rates

Use of supplementary rates

Dr Parminder Bajaj

Overheads Copy Signed

Documents

Transcript of Overheads Copy Signed